Articles Posted in Breach of Fiduciary Duty

The Securities and Exchange Commission of the U.S. (the SEC) recently fined J.P. Morgan Securities $18,000,000 for taking various steps to prevent securities whistleblowers from contacting the SEC or other securities regulators.  J.P. Morgan agreed to the Order which can be found here.

The alleged wrongdoing centered on the language included by J.P. Morgan in its settlement agreements with its advisory and brokerage firm customers to which it paid over $1,000.00.  Virtually all FINRA securities firms and Registered Investment Advisors require a confidentiality clause to be included in any settlement agreement with a customer.  These settlement agreements are often the result of various misconduct by the firms or their advisors, such as securities fraud, breach of fiduciary duty, unauthorized trading, broker theft, recommended unsuitable investments, and churning.  The reason why securities firms always require their settlements to be confidential is clear – they wish to hide their misconduct and the misconduct of their advisors from the public.  FINRA’s Brokercheck report does require firms to disclose settlements with advisors/firms, but the details are often extremely general, and one has to look up the broker directly to find the disclosures.

According to the SEC Order, from 2020 to 2023 J.P. Morgan included language in 362 release agreements that prohibited customers not only from disclosing the amount of the settlement to the SEC, but also prohibited disclosing the facts related to the account (i.e. the misconduct).  Although the releases did allow disclosure to the SEC in response to an inquiry, it did not allow the customers to initiate contact with the SEC.

An Atlanta, Georgia area investment adviser, John Woods, was recently sentenced to 8 years in prison for his role in operating a ponzi scheme. Operating over a staggering 13-year period, Woods defrauded more than 400 individuals, including retirees, seniors, and military veterans, resulting in a loss exceeding $49 million. Under the guise of his fund, “Horizon Private Equity,” Woods promised lucrative returns of six to seven percent to potential investors, claiming minimal risk and a diverse portfolio. However, investigations revealed that the money collected from new investors was used to pay returns to earlier investors, constituting a classic Ponzi scheme.

The case underscores the importance of regulatory vigilance in the investment industry. Despite assurances of safety and profitability, Woods’s actions demonstrated a flagrant abuse of trust, ultimately causing financial ruin to hundreds of victims across 20 different states.

Investment Advisers are fiduciaries, and as such they owe their customers duties of care and loyalty, both of which were flagrantly breached in this situation.  Mr. Woods was a longtime investment adviser representative at Oppenheimer & Co., Inc.

The Financial Industry Regulatory Authority (FINRA) recently issued a disciplinary order against Christopher Booth Kennedy, a former registered representative with Western International Securities, for a series of egregious violations. The order which can be found here, stemming from a complaint filed by FINRA’s Department of Enforcement, outlines Kennedy’s misconduct between July 2020 and July 2021. During this period, Kennedy engaged in churning and excessive trading in the accounts of six customers, resulting in significant financial losses.  The Order bars Kennedy from associating with a FINRA firm.

Kennedy’s actions, as detailed in the findings and conclusions of the order, paint a troubling picture of misconduct and deceit. He directed over 5,300 trades totaling more than $350 million in the accounts of six customers, with an average of 102 trades per account each month. These excessive transactions generated substantial commissions for Kennedy while causing substantial losses for his clients. Moreover, Kennedy went to lengths to conceal the true extent of these losses by fabricating account statements and providing false information to his clients.

The disciplinary order found Kennedy in violation of several securities regulations, including Section 10(b) of the Securities Exchange Act of 1934, Regulation Best Interest, and various FINRA rules.

A former stockbroker / investment advisor from Bergen County, New Jersey, has been indicted for allegedly stealing over $3 million from five unsuspecting clients. Kenneth A. Welsh, 42, of River Edge, has been charged with four counts of wire fraud and one count of investment advisor fraud, as announced by U.S. Attorney Philip R. Sellinger on November 16, 2023.

According to the indictment, from July 2017 through March 2021, Welsh, operating as a financial advisor registered with Wells Fargo Clearing Services, purportedly abused his position to misappropriate funds entrusted to him by clients. Instead of responsibly managing their investments, Welsh is accused of diverting substantial sums into accounts under his control, leaving his clients in financial distress. The charges carry severe penalties, with each wire fraud count potentially leading to 20 years in prison and a $250,000 fine, while the investment advisor fraud count could result in five years behind bars and a $10,000 fine, or twice the gross gain or loss from the offense.

The indictment details that Mr. Welsh allegedly used multiple fraudulent means to siphon off customer funds, including having customers sign forms in blank, fraudulently forging signatures, and carrying out unauthorized wires from customer accounts.

Lickhai Quach, a Silver Spring, Maryland broker/agent of Transamerica Financial Advisors, Inc., was recently barred by FINRA from association with any FINRA firm.  The FINRA Letter of Acceptance, Waiver, and Consent states that Mr. Quach refused to produce documents or information to investigators as required by FINRA Rule 8210.

Mr. Quach was allegedly under investigation by FINRA as a result of being permitted to resign “while under review by the firm for violating firm’s policy related to borrowing funds from a client.”  Mr. Quach’s FINRA Brokercheck report states that he was registered with Transamerica since 2012.  The report further states that he had one recent customer complaint relating to borrowed funds that settled, and that he was permitted to resign in March, 2023.

Registered financial advisors are generally prohibited from borrowing money from customers under FINRA Rule 3240 except in limited circumstances such as from a family member or other personal relationship.  The loan must also be disclosed and approved by the advisor’s firm.

The local Virginia Securities Fraud Lawyers of Greco & Greco are currently representing multiple Virginia customers of Richmond, Virginia based broker John Starke. These claims for investment losses have been filed in FINRA arbitration against Mr. Starke’s brokerage firm, Centaurus Financial.

As shown by Mr. Starke’s FINRA Brokercheck report, found here, in the last two years customers have filed seven complaints against Mr. Starke, most involving allegations of the sale of illiquid, unsuitable, and high-risk investments.

Alternative Investments, which include REITs (Real Estate Investment Trusts), are often sold as an alternative to more traditional stocks, bonds, and stock and bond funds. These higher-risk investments are often touted for their high returns, especially in a low interest rate environment, however those high returns are accompanied with corresponding high risk.

The Securities and Exchange Commission (SEC) has taken significant action against Bruderman Asset Management, now known as Gary Goldberg Planning Services, LLC (BAM), and its founder, Matthew J. Bruderman. The SEC has instituted public administrative and cease-and-desist proceedings against these entities, with a final Order found here, citing violations of the Investment Advisers Act of 1940. The proceedings revolve around the alleged misuse of client funds by BAM, which raised over $6.1 million from investment advisory clients and directed these funds towards entities with ties to Bruderman. The SEC alleges that these actions violated various sections of the Advisers Act, including Sections 206(2) and 206(4), and Rule 206(4)-7.

According to the SEC Order, between February 2017 and August 2021, BAM, under Bruderman’s direction, persuaded at least thirteen investment advisory clients to invest substantial amounts totaling $6.1 million in entities where Bruderman had significant ownership and decision-making authority. Shockingly, these clients were not informed that their investments would temporarily be diverted to cover expenses unrelated to their intended investments or to repay loans made by Bruderman himself.

One particularly concerning example involved a $500,000 equity investment, where $400,000 was transferred to Bruderman’s personal bank account to repay a loan owed by one of the entities. The clients invested based on BAM’s advice, unaware of the temporary diversion of their funds. Despite BAM’s written policies requiring disclosure of material conflicts of interest, these conflicts remained undisclosed, leaving clients in the dark about the use of their investments.

On July 25, 2023, the Financial Industry Regulatory Authority (FINRA) issued a Letter of Acceptance, Waiver, and Consent (AWC) against LPL Financial LLC, a prominent independent securities broker headquartered in Fort Mill, South Carolina. This disciplinary action followed a series of egregious violations that involved the conversion/theft of approximately $2.4 million of customer funds by two of the firm’s brokers.

Background

The AWC against LPL Financial LLC was the result of a failure to reasonably supervise the transmittal of customer funds, which enabled two firm registered representatives to convert substantial sums of money for their personal use. The findings by FINRA in the AWC are outlined below:

FINRA has announced on its website that it has barred Tennessee financial advisor D. Wray Rodgers of Collierville.  According to FINRA’s Letter of Acceptance, Waiver, and Consent, Mr. Rodgers was registered with the firm Vining-Sparks IBG, LLC, and FINRA had begun an investigation regarding “whether Rodgers engaged in an outside business activity without providing prior written notice to his member firm and whether he misused customer funds.”

Vining-Sparks had filed a U-5 filing for Mr. Rodgers stating that he had voluntarily resigned from the firm in May 2022.  According to the AWC, Mr. Rodgers failed to appear for related on the record testimony, and he and FINRA agreed to a sanction of a bar from registering with FINRA securities Broker-Dealers.

Mr. Rodgers’ FINRA Brokercheck report shows one customer complaint relating to an alleged failure to disclose risk from 2011, with a $105,000.00 settlement.

FINRA announced last month that it has barred Charlotte, North Carolina based financial advisor Christopher J. Carpenter.  The FINRA Letter of Acceptance, Waiver, and Consent states that Mr. Carpenter failed to produce documents or information requested in response to a FINRA investigation.

The investigation allegedly was initiated in response to a Uniform Termination Notice for Securities Industry Registration (Form U5), reporting Carpenter’s discharge from his firm, LPL Financial. The Form U5 stated that LPL was reviewing Carpenter’s “alleged participation in unapproved real estate investments with customers.”

Mr. Carpenter’s FINRA Brokercheck report states that he was registered with LPL in Charlotte from 2020 to 2023, and prior to that he was registered with Spire Securities.

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